Climate change is the greatest challenge facing humankind. Trillions of dollars are needed to meet the goals of the 2015 Paris agreement. Many low-income and developing countries require concessional and grant resources to play their part. But advanced economies face scarce budgetary resources.
To help square the circle, copious proposals focus on using the International Monetary Fund’s special drawing rights. Imagine a pot of money in the hands of creative financial engineers, investment bankers, leading think tankers and environmentalists. There could be recycling, rechannelling, donations, trust funds, hybrid capital, leveraging, multilateral development bank SDR bonds and annual allocations of $500bn.
Too much is being asked of the SDR
The SDR is a reserve asset that can be allocated with an 85% weighted majority vote of the IMF’s membership. A general allocation ‘should meet a long-term global need to supplement existing reserve assets in a manner that will promote the attainment of the IMF’s purposes and avoid economic stagnation and deflation’.
In 2021, the IMF allocated $650bn of SDR following liquidity upheaval in global financial markets at the pandemic’s outset. Consistent with Fund rules, the allocation was distributed according to members’ weights, so advanced economies received the bulk of the funds.
By the time of the allocation, liquidity stresses in global markets had largely dissipated. With the bulk of SDR allocated to the largest IMF members with little need for supplemental resources, the likelihood was that the funds would – as in the past – simply sit on their books.
Funding climate needs
Given this reality and that climate change is rightly a major focus of the international community, the IMF, along with large advanced economies, put forward a novel, innovative approach. Major countries agreed to re-channel $100bn in excess SDR holdings. A significant part of this would go into a trust for a Resilience and Sustainability Facility, which would allow members to receive augmented longer-term RSF finance for macroeconomically critical climate-related reforms.
To its credit, the RSF conditionalises the use of SDR, which can otherwise be deployed unconditionally even if a country is off-track in its economic performance, by tying the RSF to an underlying Fund programme. The RSF has generally been successful with 16 programmes and commitments of $7bn made by early January 2024. Whether the RSF still needs major improvements is a topic for debate.
But the 2021 allocation, let alone rechanneling only a small part of that over a multi-year period, is a drop in the bucket. A raft of creative SDR proposals emerged to generate more resources and more value for money. There are proposals for: World Bank or MDB issued SDR bonds, African Development and Inter-American Development Bank hybrid capital issuances and SDR allocations of $500bn annually for 20 years. Other proposals abound, including rechannelling SDR via the MDBs, guarantees and SDR donations.
The IMF has an important role to play on climate. Issues such as carbon pricing are squarely in the Fund’s remit. If a small island country needs to expend macro-critical fiscal resources for mitigation, that needs to be budgeted. But many SDR aspirations extend far beyond realism.
Limitations to what SDRs can achieve
Addressing climate change generally involves longer-term projects and structural policies exceeding the Fund’s shorter-term horizon and expertise.
SDRs are not a free handout – if the US donates an SDR to a trust, it would lose interest (and doing so would most likely require Congressional approval). Even if the US buys an SDR, it must give up a dollar to do so. If a low-income country sells an SDR, it must pay a market rate of interest, adding to its debt unless compensatory concessional or grant assistance is afforded. The lack of conditionality associated with using SDR gives rise to concerns. The financial structures of the IMF and MDBs are different, complicating rechannelling proposals from one to the other.
Under IMF rules, allocations are in principle only possible once within a standard 5-year ‘basic’ period. Appetites for allocations are highly limited in many key countries – especially at a time when the global financial system is not facing acute liquidity stress – that see the SDR as a reserve asset, as provided for in the IMF’s Articles, and are wary of using it for broader purposes. This is perhaps a modern version of debates in the 1960s and 1970s about tying a portion of an SDR allocation to aid for low-income countries.
Humankind must stand ready to direct massive financial resources in the fight against climate change. The RSF is generally a positive development and some of the proposals for using proceeds of the last SDR allocation may merit reflection.
Advanced economies, however, must clearly step up to the plate. The best way to do so is through budgeting fiscal resources. But regrettably nowhere near adequate fiscal resources are forthcoming. It is therefore understandable that environmentalists, civil society, thought leaders and many policy-makers would search for alternative ways to mobilise such funding.
In focusing heavily on SDRs, though, they are entering the realm not even of second bests, but perhaps third or fourth bests. They are asking the IMF to play a role that arguably goes well beyond its mandate and capabilities. Some might contend that the dire situation demands the Fund does so. But they are asking for much more than the IMF can realistically deliver.
Mark Sobel is US Chair of OMFIF.
